Spain tightens austerity screw in 2013 budget

Spain’s government unveiled a 2013 budget that tightens austerity even in the teeth of growing protests, easing the path to a widely expected sovereign bailout.

The 2013 budget rakes in 39 billion euros ($50 billion) in spending cuts and tax increases so as to curb the public deficit despite a recession, a jobless rate of nearly 25 percent and soaring debt repayments.

Only old-age pensioners were spared in the slew of cuts, aimed at ensuring Spain complies with its commitment to the European Union to get the public deficit under control.

“It is a budget for a period of crisis, but aimed at getting out of this crisis,” Deputy Prime Minister Soraya Saenz de Santamaria told a news conference after a cabinet meeting.

Defying market scepticism, Madrid vowed to slash the deficit from a blowout figure of 8.9 percent of economic output last year to 6.3 percent this year, 4.5 percent in 2013 and 2.8 percent in 2014.

“It is a major commitment to reducing the public deficit but also oriented towards economic growth and creating employment” Budget Minister Cristobal Montoro told a news conference.

The focus is on spending cuts, the government said.

Expenditure by ministries is lowered by 8.9 percent, public sector salaries are frozen for the third year in a row and the regions, which pay for health and education, must find seven billion euros in savings.

But retirement pensions are expected to go up by one percent, sticking to a key pre-election promise of Prime Minister Mariano Rajoy’s conservative government.

One other big item going up next year, however, is the cost of servicing Spain’s public debt — with interest payments forecast to leap 33.8 percent to 38.6 billion euros.

With a jobless rate of nearly 25 percent, social security spending accounts for nearly two thirds of the nation’s expenditure.

In addition to a boosting sales and income taxes, the government agreed to tax lottery winnings above 2,500 euros at 20 percent, extend wealth taxes and curb corporate tax breaks for depreciation.

Structural reforms in the budget, agreed with Brussels, featured further changes to the labour market, cutting red tape and new measures to liberalize markets such as energy and telecommunications.

To reassure markets of Spain’s determination to meet its deficit-cutting targets, the goverment announced it would create an independent fiscal authority to check any budget slippages.

The formulation of the 2013 budget, to be followed by the release of an audit of Spain’s sickly banking system on Friday, is seen on the markets as one of the final acts before a sovereign bailout.

The eurozone has already agreed to extend a rescue loan of up to 100 billion euros for a banking system bogged down by bad loans that piled up after a 2008 property crash.

If Spain formally requests a broader sovereign bailout, it would become eligible to benefit from a bond-buying programme for troubled states that was outlined by the European Central Bank on September 6.

Such a programme would curb Spain’s borrowing costs but to qualify Madrid would have to formally apply for help from the European Stability Mechanism and submit to its conditions.

Importantly, Brussels welcomed the budget.

The European Union’s economics chief, Olli Rehn, said it was “a major step to broaden and deepen structural reforms” and praised its “concrete, ambitious and well-focused measures”.

But Spain’s problems appeared to be multiplying.

Investors are deeply concerned about political tensions between Madrid and the northeastern Spanish region of Catalonia, which has called snap elections on November 25 in a drive for more independence.

The debt-struck region’s parliament Thursday voted for referendum on Catalonia’s “collective future”. Spain’s central government has vowed to thwart any attempt to hold a poll on Catalan independence.

The regions’ debt situation is perilous, forcing many to apply for help from an 18-billion-euro central government liquidity fund.

Castilla-La Mancha asked for 848 million euros on Thursday, adding to earlier requests from Catalonia, Valencia, Andalusia and Murcia that already amount to a total of about 15 billion euros.

Also sapping market confidence was a joint statement by the German, Dutch and Finnish finance ministers on Tuesday “which cast doubt on whether the rest of the eurozone will bear any of the costs of providing support to Spain’s banks”, said Ben May, London-based analyst at Capital Economics.

If Spain has to foot the bill for restructuring of its banks, its overall sovereign debt will rise and its deficit-cutting task will become even more urgent.